ETF Share Classes Are a Go for Dimensional: Here’s What Investors Need to Know

The first actively managed exchange-traded fund share classes are one step closer to becoming a reality.

Dimensional submitted its first request for ETF share classes on Thursday, Oct. 9, 2025. The filing outlined the 13 mutual fund candidates that should receive an ETF share class soon. Dimensional chose those 13 mutual funds because they’re best suited to accept an ETF share class operationally. State Street serves as the custodian and accounting agent for all 13, while other funds use a different custodian, which complicates the process.

The Securities and Exchange Commission filing came just 10 days after Dimensional received a notification from the SEC stating that it intended to approve Dimensional’s broader application to use ETF share classes. Both are subject to final approval from the SEC, but there doesn’t appear to be anything that would stop them.

Dimensional plans to charge the same management fee for each proposed ETF share class. If all goes well, it plans to prioritize adding ETF share classes based on client feedback and introduce a few per month. Applications to add an ETF to other mutual funds should follow as the background operations get sorted out.

Dimensional's ETF Share Class Fees

What Is an ETF Share Class?

Most mutual funds offer access to investors through various share classes. Vanguard introduced a tweak to that structure in May 2001 when it added an ETF as a new share class of Vanguard Total Stock Market Index VTSAX

. That gave Vanguard’s clients the choice of investing in the fund through either a mutual fund or ETF. The unique structure extended the ETF’s tax benefits to mutual fund shares. It has since introduced an ETF share class to dozens of mutual funds over the years, all of which track an index.

Vanguard had a patent on the unique ETF-as-a-share-class structure until May 2023, and it was only allowed to use the hybrid structure on its index-tracking mutual funds. Over the ensuing two-and-a-half years, more than 75 asset managers have filed applications with the SEC to use the hybrid structure.

The Potential Benefits and Drawbacks of ETF Share Classes for Investors

The ETF share class, when used appropriately, should benefit investors and asset managers alike. The hybrid structure would allow existing mutual fund investors access to the ETF’s tax efficiency. Funds that add an ETF share class are expected to offer “exchange privilege,” meaning investors wouldn’t have to sell their mutual fund shares to purchase a stake in the equivalent ETF share class, which could trigger capital gains distributions and taxes. Instead, bolting on an ETF share class gives them the tax advantages of the ETF’s redemption mechanism that can reduce, if not eliminate, capital gains distributions.

Investors in the mutual fund share classes are the biggest benefactors. The ETF share class can purge stocks and bonds with built-up capital gains through its in-kind redemption mechanism. In-kind creations and redemptions keep the ETF tracking the fund’s net asset value throughout the day, while cleansing its portfolio of potential capital gains distributions. The benefit extends to the stocks and bonds held by mutual fund share classes of the same fund, and it’s part of the reason why Vanguard’s mutual funds with an ETF share class seldom distribute capital gains.

ETF shareholders can also stand to gain from the dual-share-class fund structure. A new ETF can get immediate credibility when attached to a mutual fund with a broad client base and an established track record. Mutual fund cash flows can also potentially give the fund more flexibility in rebalancing its portfolio, thus lowering the fund’s transaction costs.

These benefits come at the cost of some trade-offs for investors. The flip side of shared tax exposure is that ETF shareholders could end up paying taxes on capital gains that it would otherwise purge as a stand-alone ETF. Certain situations, often prompted by the actions of investors in the mutual fund, can leave investors in the ETF share class on the hook for capital gains distributions.

Those situations are rare. Large outflows from the mutual fund share classes, moot outflows from the ETF, combined with an increase in value of the fund’s underlying assets must all align at the right time for those distributions to show up. Such instances are so unlikely that it has only happened once in Vanguard’s nearly 25-year history with the ETF share class, though the chances are much higher that ETF investors subsidize other mutual fund share class investors in active strategies with high turnover.

ETF share classes won’t work for every mutual fund. Some active managers protect their edge by closing their doors to new money as they get bigger. But ETFs can’t shut their doors, so the ETF share class forfeits that feature for the entire fund. ETFs also disclose their holdings every day, and some managers are concerned that this could pull back the curtain on their secret sauce.

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Why Asset Managers Want ETF Share Classes

Rarely does the fund industry unite under the same banner. Yet, over 75 firms have filed for the dual-share-class structure. They include ETF industry leaders, like BlackRock and Vanguard, as well as firms without any ETFs in their lineups, like Baron Capital and Lord Abbett.

The simplest explanation for the fund industry’s unified front is the access they get to all types of investors, who are increasingly opting for ETFs over mutual funds. It’s a way for mutual fund strategies to get into the ETF vehicle. Until now, asset managers had to create a new stand-alone ETF or work through the clunky process of converting a mutual fund into an ETF.

Popular funds in 401(k)s were captive to the mutual fund structure because they couldn’t convert into ETFs. Likewise, if ETFs are allowed to add mutual fund share classes, then ETF providers will gain access to retirement plans.

Mixing ETFs and mutual funds allows asset managers to provide investors with a single solution, regardless of their vehicle preference.

What Comes Next?

Many operational challenges remain for widespread adoption of ETF share classes, and how the ETF ecosystem will adapt to an influx of ETF share classes remains to be seen. Dimensional is already the largest provider of active ETFs in the US, so adding share classes should be an extension of its existing capabilities. But there are some unknowns. New providers will still have to develop their ETF management capabilities, and an uptick in new ETF launches could put additional stress on market makers. Furthermore, it’s unclear how some of the specialized trades that keep ETFs tax-efficient will be funded.

ETF share classes are poised to give investors new options and, in some cases, better capabilities. But investors should understand if there’s a clear benefit from a dual-class structure before jumping in headfirst.